M&A activity has been as busy as I’ve ever seen it. Our brokerage company and others have been involved in a record number of transactions. Not only is volume high, values paid for insurance agencies are also increasing. To get the maximum price when selling your agency, it helps to understand how to value your book of business and, in most cases, the value is not simply a multiple of commission. Most agencies are sold at a price driven by earnings, the risk associated with earnings and the availability of financing. Let’s discuss how each of these factors play into a buyer’s valuation.
Prospective buyers often value an agency on projected earnings not commission revenue, because they expect to be able to cover debt service and earn a fair return on their investment. Historically, the average small agency sells for four to five times its adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization adjusted for excess expenses associated with ownership). The adjusted or pro forma, future looking, EBITDA generally increases with the size of the agency to as high as 15 or so times for publicly-traded brokerage companies with billions in revenue.
To calculate your adjusted EBITDA, start with your prior year’s corporate tax return and use this equation:
+ Owner’s W2 Salary
+ Interest on Loans
+ Taxes Paid
+ Non-recurring Expenses
+ Owner’s Personal Expenses
– Manager’s Salary (Market Value)
To secure financing, a buyer will need to conduct thorough due diligence on your agency to assess the inherent risk.
Expect to answer these questions on your earnings:
- What products do you sell?
- Is the revenue trending up, down or flat and why is it doing so?
- How clean are your financial records?
- What are your retention rates?
- What are the commission rates?
- Are you writing with rated carriers?
- How relationship-dependent are your accounts?
- How large are your accounts?
- How effectively are you cross-selling?
The lower the perceived risk involved with post-sale retention, the higher the perceived value in the book of business. These risks factors can raise or lower the selling price by 30% or more.
In any small business sale, third-party financing makes a deal more attractive to both parties. With it, the owner no longer has to act as the bank, and the buyer can leverage their capital and gain an extra set of eyes in conducting due diligence. Without lenders, you may be forced to accept a lower price or hold a large note to sell your agency. Financing also opens up the sale to a larger pool of potential buyers, which is essential for competitive bidding. Typically, the more money that can be borrowed to finance an acquisition, the more likely it is that you will obtain the best price for your agency.
There are only a few lenders in the marketplace that understand insurance agencies and, hence, will finance an agency sale transaction at a real market price, so it is important to work with a lender that specializes in the industry.
Selling strategy pays off
Though most agents have a business plan, many don’t have an exit strategy. Improper planning can cost you hundreds of thousands of dollars when it comes time to sell. A few years prior to executing a sale, consult with an accountant, an experienced business brokerage or merger and acquisition intermediary, and a specialized insurance lender. These parties can work with you to develop a strategy that will help to maximize your net proceeds.
About the Author
Michael Mensch is a Certified Business Intermediary and Merger and Acquisition Master Intermediary specializing in the valuation and sale of insurance agencies nationwide. He can be reached at firstname.lastname@example.org or (321) 255-1309.